Thursday, December 19, 2013

Bye Bye Bernake

Yes I picked this clip because I liked the series, not because Bernanke has anything to do with Pappy Boyington - other than the allusion in the title..

"QE2? Wasn't that a big assed party boat?"

I admit, thinking through what QE2 does is hard, because to most of us it just doesn't make much sense. As a programmer, I generally find that if some complex operation doesn't make much sense, it generally is the root cause of a problem. I am thinking that we will find that QE2 (or 3, or 4) is probably the most caustic, damaging, thing that a government can do to a free and independent people.

So let's go down that rabbit hole and see what is going on. 'Quantitative Easing' (or QE) sounds pretty fancy but vague right? Like most made up government programs it could mean almost anything, from making sure that hammock manufacturer use an appropriate amount of squash products in their production to ensuring that all red headed women are advised of the dangers of traffic cones while navigating the barrios of LA. Well meaning, pointless exercises that mostly won't hurt anyone, right?

Well, not exactly. What is actually going on is this. The Fed notices that there are a great many companies and people borrowing money to keep things going. As the debt gets higher and higher, it gets harder and harder for those people to get more credit, keep buying things, and things keep going. The solution is for the Fed to step in and buy debt from the banks. Why that sounds just great, right? I mean the government prints the money, so its got lots of it. Buying debt, especially long term debt just makes that debt go away and the banks are free to loan out more money to people to buy things.

Not exactly. The one flaw in this is where does the Fed get the money to buy this debt? While they do literally print money, the amount of money in circulation is kinda encumbered by those silly elected people in Congress. So what's a Fed to do? Well, up to a point, they can issue new debt in the form of treasury bonds. Banks love those because they guarantee a return and, compared to the rest of the crazy market, are a fairly safe investment. So banks (and other foreign and domestic investors), gobble them up. Then the bastards in Congress get all snippy about not letting the public debt get too high, so the Fed has to buy that debt back. Wash. Rinse. Repeat.

As long as no one notices all this money moving in a circle this works beautifully. The stock market cheers, as they are getting the benefit of people buying things and things are wonderful in the short term: there are chickens in every pot or pot in every chicken; thank you Obamacare! Since the debt being bought back is not due for several years and is spread over trillions and trillions of dollars, following the money is hard. Common sense says at some point people are going to realize that no one is working anymore and no one has any real money. But, as Bernanke has demonstrated, the farther out you buy the debt, the longer you can play the game.

Here was my acid test on this. Bernanke insist that "There has been meaningful progress with the job market". Now let's think about that for a minute. The only reason that the job market looks good is the massive number of people that have 'given up' looking for a job and no longer counted as unemployed. As anyone looking for a job can tell you, from high tech gurus to general laborer, there are just not that many opportunities out there and most employers are reluctant to hire. This trend is not getting better. Bernanke is supposed to be an economic genius. To say that 'progress has been made in the job market' demonstrates his disingenuousness and makes the rest of his statements suspect. 

The wages of QE2 (and 3, and 4) are coming due, and I fear there is nothing that anyone can do to stop it. My greatest fear for the country and my family is that in 10 years we will look back on the 'Obama Years' as the good economic times that stole our future. Do you think i'm being over-dramatic? If you are over 30 years old, take a minute and think back to 1999. Were you economically happy and productive back then? How does that compare to where you are now? Now imagine that slide down continuing. It's not a pretty sight, is it?

Food for thought on the start of this lovely December day.

No comments:

Post a Comment